Here are two superb articles on the financial crisis.
First, from Peter Wallison at the American Enterprise Institute, we have a piece on the role of government housing subsidies. Since he warned, in advance, that Fannie Mae and Freddie Mac were ticking time bombs, Peter has great credibility on these issues. Here is his key argument, but read the article to see how bad government policy lured people into making dumb choices.
…the financial crisis would not have occurred if government housing policies had not fostered the creation of an unprecedented number of subprime and otherwise risky loans immediately before the financial crisis began.
Second, there’s an article from Roger Lowenstein at Bloomberg that examines why so few Wall Street bigwigs were prosecuted. Here’s his basic premise, but read the entire article to learn how Wall Street executives may have been greedy SOBs, but that’s true when they make money or lose money. What matters, from a legal perspective, is whether someone committed fraud, theft, or some other crime.
…these sentiments imply that the financial crisis was caused by fraud; that people who take big risks should be subject to a criminal investigation; that executives of large financial firms should be criminal suspects after a crash; that public revulsion indicates likely culpability; that it is inconceivable (to Madoff, anyway) that people could lose so much money absent a conspiracy; and that Wall Street bears collective guilt for which a large part of it should be incarcerated. These assumptions do violence to our system of justice and hinder our understanding of the crisis. The claim that it was “caused by financial fraud” is debatable, but the weight of the evidence is strongly against it.
The only thing I will add is that failure is an integral part of a free market system. When critics say that the financial crisis proves that markets don’t work, they obviously don’t understand that capitalism is a process that continuously provides feedback in the form of profits and losses.
So the fact the people and businesses sometimes lose money is to be expected (indeed, capitalism without bankruptcy is like religion without hell). From a public policy perspective, though, it’s important that people are not encouraged to make dumb decisions with government subsidies – or shielded from the consequences of those poor choices with bailouts.
And that’s why government intervention deserves the overwhelming share of the blame for the financial crisis.
International Liberty 
[…] the Federal Reserve also deserves criticism for flooding the economy with too much […]
[…] 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie […]
[…] the fact that many people actually blame deregulation for the financial crisis, notwithstanding all the evidence to the contrary, makes me think that would be a Pollyannish interpretation of the polling […]
[…] the main causes of the 2008 meltdown were bad government policies,such as easy-money from the Fed and corrupt housing subsidies from Fannie Mae and Freddie […]
[…] the main causes of the 2008 meltdown were bad government policies, such as easy-money from the Fed and corrupt housing subsidies from Fannie Mae and Freddie […]
Financial crisis in a country has many causes such as bad governance, poor planning by the government, giving false information about the economy making the citizens to believe that the country is doing well, corruptions, careless spending etc. We can say all this contributes to bad governance. To avoid all this the reverse will work.
[…] words, we’re still dealing with some of the fallout of a housing bubble/financial crisis caused in part by the Fed’s easy-money policy last […]
[…] words, we’re still dealing with some of the fallout of a housing bubble/financial crisis caused in part by the Fed’s easy-money policy last […]
The Causes of the Economic Crisis for non Economists
http://www.scribd.com/doc/201709399/The-Causes-of-the-Economic-Crisis-For-Non-Economists-A-Free-Market-Approach
[…] financial institutions gambled on the government’s misguided policies and got caught with their pants down when the bubble […]
[…] financial institutions gambled on the government’s misguided policies and got caught with their pants down when the bubble […]
[…] I especially like the point about Canada avoiding the financial crisis and the housing bubble. There’s a simple explanation. Our neighbors to the north avoided the government mistakes that caused the housing bubble in America. […]
[…] want more costly red tape in America, particularly when the evidence is quite strong that the crisis was caused by government intervention. Needless to say, the politicians ignored my advice and imposed the costly Dodd-Frank bailout […]
how do exactly greed controbute to glibal finacial crisis to day
[…] explained on many occasions how the financial crisis was largely the result of government-imposed mistakes, and I’ve paid […]
[…] explained on many occasions how the financial crisis was largely the result of government-imposed mistakes, and I’ve paid […]
[…] they blame the market for the financial crisis, when the mess was the result of the Federal Reserve, Fannie Mae, Freddie Mac, and government-created moral hazard? Do they blame the market for the sovereign-debt crisis, when the mess is the result of […]
[…] they blame the market for the financial crisis, when the mess was the result of the Federal Reserve, Fannie Mae, Freddie Mac, and government-created moral hazard? Do they blame the market for the sovereign-debt crisis, when the mess is the result of […]
[…] these feckless and irresponsible jokers should spend a bit of time reading Peter Wallison’s work. And here’s a George Will column if they can’t comprehend anything longer than 800 […]
[…] I also am pleased when I get to use the line about “capitalism without bankruptcy is like religion without hell.” One of the reasons I loathe bailouts is that such corrupt practices discredit capitalism. […]
[…] But it’s not just that bailouts encourage bad behavior in the public sector. They also promote moral hazard, leading financial institutions to make excessively risky loans because of an expectation that taxpay…. […]
[…] you want to understand how government intervention screws up markets and damages an economy, there are two new publications worth reading. First, pick up a copy of Reckless Endangerment, a […]
[…] you want to understand how government intervention screws up markets and damages an economy, there are two new publications worth reading. First, pick up a copy of Reckless Endangerment, a […]
[…] 5, 2011 by Dan Mitchell If you want to understand how government intervention screws up markets and damages an economy, there are two new publications worth reading. First, pick up a copy of Reckless Endangerment, a […]
[…] I suppose it would be appropriate to mention that this kind of intervention has costs. When government creates the illusion that there is little or no risk, it lures people into behaving more recklessly. The housing mess is a good example. Government subsidies and guarantees caused a boom-bust cycle largely by making it seem like housing was a risk-free investment. […]
I would not call Peter Wallison’s article “superb” in any way. He is writing the same basic article he’s written for the past two years, making the same basic distorted claims. Unfortunately, Mr. Wallison seems to be generally considered to be a paid apologist for big banks rather than an honest analyst.
A refutation of Mr. Wallison’s claims is too long to add here as a comment. Instead see http://somerandomthoughts-mythoughts.blogspot.com/2011/05/did-government-cause-financial-crisis.html.
Here’s my 2¢ take on what fomented the crisis and I’ll add that I’m not an economist nor have I ever taken a formal course in economics.
When I was a kid in the 50’s in Pennsylvania, there were factories all over the place. Just about every product in the store had a label reading “Made in the USA.” Banks paid 3% interest on passbook savings accounts and S&Ls paid 3.25%. Given the rate of inflation at the time, those rates encouraged people to save rather than spend and those savings were lent to industry not to mall developers. The mortgage rate at your local bank was a stiff 6% and you had to put 20 or 25% down, though veterans could get a VA mortgage with 3% down and an interest rate of 4 3/4%. Most students who attended high school joined the work force, many at age 16 when they could get their “working papers.”
Now jump to the present. Most of the factories have long since closed down. Globalism is the reigning ideology of the power elites and the best and brightest minds are employed on Wall Street conjuring up new classes of financial instruments or pursuing careers as “personal injury” lawyers. The lesser lights find employment in the service economy like selling each other real estate, insurance, mortgages, foreign cars, etc., pushing papers back and forth in high-rise offices or driving trucks, checking out goods at WalMart or goldbricking at some government job. All the while, the USA is racking up massive merchandise trade deficits, which “new paradigm” economists contend don’t matter.
Is it no wonder that we find ourselves in the throes of a financial crises, which has yet to play itself out? When you destroy your industries, you destroy your wealth. It’s as simple as that.
You make a good argument for why there shouldn’t even be a Federal Reserve. The financial industry would become instantly more risk-averse and accountable for its actions if it knew the Fed wasn’t going to be there to bail them out and manipulate our currency to alleviate losses. The Fed has become far too powerful to be trusted. You’re right: it exercises its policies based largely on economic theories that are completely impractical when applied in real-life situations. And the Fed and financial industry HAVE become too closely connected…but the Fed is the toxic half of that partnership. Power needs to be taken away from these govt beaurocrats, who ironically only feel accountable to the ppl they should be regulating, and given back to the states. The financial industry shares the blame for our economic situation, but I liken it to a dog that is left alone in a room with a ham sandwich in front of him, and is then blamed for eating it. Greed and power are part of being human, as sad as it is, but we cannot fix the problem with more greed and power -given to few in the govt. When our govt looks the other way while claiming to protect ppl, we know it is time for their power to be revoked.
The crisis was caused by the unnatural separation of profit from risk in the economy, particularly in the financial services industry. The fraud perpetrated by the industry on borrowers and investors has been massive. Rather than force the fraud out into the open, the government, through the captive institution of the federal reserve, has socialized the losses that would have flowed to the banks as a result of the fraudulent conduct of their leaders. The accounting control fraud has been well established in other media outlets, even if this blog refuses to acknowledge the facts, and should have resulting in two things: 1) bankruptcy for the major banks, subsequently saved by the very federal reserve that they control, and 2) prison for the criminals. The problem with the federal reserve is not just that it works for the interests of the financial sector, at the expense of the rest of us, but that on a less sinister level it is comprised of academics that have no place in their economic models for fraud. Fraud is the dishonest separation, through lies and misrepresentations, of the risks of a transaction from its rewards. This is what the banks did, illegally. But, the fed has not regulated, because it does not acknowledge the importance of the phenomenon. This blog concurs, at least as far as the above post is concerned, and is therefore complicit in the problem. As long as conservatives refuse to acknowledge that financial services, and central banking, are functions derived largely from government fiat, and must be well regulated against fraud, they will encourage the bubbles and accompanying frauds that seriously undermine the credibility of the free market system and the important value of private property and inititiative. Our economy has become overdominated by a government which is overdominated by a financial services industry that is basically unregulated and dedicated to fraud as a business model. God help us is conservatives do not return to the true essence of free enterprise and encourage a process of private capital formation which the socialists and monetarists are dedicated to destroying. The socialists want us all dependent on their government handouts, and any self-funding of activity is against their designs. The bankers and other financial services vipers want to collateralize every asset and income stream in the free market so that we are all debt slaves. Our whole economic and political system is now sadly biased towards these interests. Make no mistake, when the offshore world is shut off to Americans, it will be to serve the interests of the socialist agenda, but the financial interests, to which their programs are driving us further into debt, will still have full access to all their offshore and other loopholes. The above blog post is shameful in its ignorance and complicity.